Manufacturers, wholesalers, suppliers, distributors, and other types of vendors in a supply chain communicate the attributes and terms of any items offered for purchase through the exchange of business forms, each of which is unique to the specific retailer. Of these several processes of communication, there is an especial and complex effort to promote products to retailers and encourage sell-through to the consumer by offering the retailers a complex assortment of discounts, allowances, payments, terms, and performance incentives. Examples of these promotion schemes include reducing the price per case of a product, funding an advertising event, and conditional payment based on sales. However, many vendors and retailers (e.g., grocers) of consumer packaged goods (CPG) consider these promotions their primary management and spending problem. The more money vendors invest in promotions, the greater the number of individual promotions, and the greater the burden of keeping the paperwork in order. Each deal imposes a variety of transaction costs on the trading partners. These costs include completing tens of millions of deal sheets, planning and negotiating each deal's terms, auditing performance, and reconciling payments. For retailers, these costs often limit consumer pass through to half the value offered by the promotion.
The direct costs of promotions are a substantial and material portion of the manufacturer's costs, often amounting to 15% of sales. In addition, manufacturers incur material costs meeting an individual retailer's business process requirements for the creation, dissemination, negotiation and documentation of promotions. Manufacturers are also obliged to offer promotions to their retailers in compliance with federal and state anti-trust regulations, such as the Robinson-Patman Act.
Retailers compete for the promotions and payment terms offered by their vendors. For retailers, promotions are an important and profitable merchandising tool. For example, grocers often earn up to 40% of their net income through promotional programs. Generally, the value of the promotions retailers receive can be equal to 10% or more of their sales. However, retailers also incur material costs associated with managing their business processes for promotions. These costs are commonly as high as 5% of their sales. Similar to their vendors, retailer participation in promotions is also subject to antitrust regulations, including the Robinson-Patman Act.
Retailers and their supply chain trading partners are also required, as applicable, to satisfy accounting and reporting requirements, including Financial Accounting Standards Board (FASB) directives, SEC and other stock exchange regulations, and the Sarbanes-Oxley Act. These rules and regulations require companies to document the terms of their promotions, adjust sales and costs of goods sold according to the terms of each promotion, administer internal financial controls and certify the accuracy of their financial reports. The value of the promotion is a material modification of the listed prices for the promoted products; therefore, compliance with financial regulations is dependent upon scrupulous documentation of any promotions.
In current practice, documented promotions are considered by retailers to be binding commitments of the vendors to comply with the terms of the promotion; however, retailers usually do not commit themselves as counterparties to a contract through the process of negotiating a promotion. Retailers may or may not undertake to fulfill any performance required of them by the terms of the promotion in order to earn any allowance, payment or incentive negotiated with a vendor. Consequently, retailers and their trading partners must subsequently determine and agree whether or not a retailer has met the burdens of performance required to earn the benefits offered per terms of a promotion. The quality of this process of auditing and reconciliation is critically dependent upon the quality and consistency of the trading partners' sources of information documenting their promotions. Given the limitations of conventional systems and methods for managing the business processes associated with promotions, the auditing and reconciliation process is time consuming, often requiring years to achieve a final reconciliation. It is frequently a source of controversy and mistrust between trading partners.
There are several systematic and methodical approaches to the current art of managing promotion business processes. In one approach, the vendor uses an EDI (Electronic Data Interchange) protocol and means of EDI messaging, such as a Virtual Private Network to communicate the terms of a promotion to a retailer. The trading partners may thereafter negotiate final terms requiring the vendor to submit an amended EDI document. The limitation of this system is that the EDI protocol supports a small fraction of the diverse types of promotions commonly offered. Additionally, EDI systems are costly and not widely used. They have been adopted by less than 10% of the retail supply chain members.
In another conventional approach, the retailer provides its vendors with a multi-page carbon paper form. Vendors must complete this form to document their offers of any promotions. In the event of any negotiated changes to the terms of the promotion, the vendor submits an additional revised paper form. When paper forms are used, the workload and organizational requirements of manual submission and processing of millions of paper forms for various promotions are unmanageable, inefficient, and a source of friction between trading partners. Problems include heavy administrative burdens (filing, storing, retrieving), keypunch and other input costs, data entry errors, duplicated effort (i.e. missing items on deals, wrong dates), limited access to information, and missed promotional monies. In addition, with all of the paper shuffling, offers or requests for promotions can be entirely missed.
In another conventional approach, the retailer provides its vendor with an Excel template form. The process of managing Excel template forms is otherwise similar to the process of managing carbon paper forms.
In yet another conventional approach, a retailer adopts proprietary software presenting the vendors an interface requiring the vendor to input the terms of the promotion into the data fields of the interface. This software may be offered to the vendors for installation on their own computers, or, the retailers may present the interface through kiosks that are accessible to their vendors. As applicable, vendors may be required to retransmit promotion terms.
In addition, conventional techniques of retail supply chain communications may be predicated upon the abandonment of the unique and company specific data standards and forms that characterize the accepted processes in favor of a common industry standard, or, in favor of some other proprietary standard based upon a shared data type definition and transaction set that may be applied piecemeal to such companies. For instance, one conventional technique attempts to standardize a portion of the attributes that characterize an item, such as its color or weight. Conventional approaches do not provide any such standard for the communication of prices or promotions.
Each of the above-mentioned approaches to promotion management is considered by persons knowledgeable in the field to be limited and suboptimal in consideration of recent growth in the number of promotions, increasing complexity of the terms of promotions, and new regulatory requirements. In addition, none of these approaches directly supports the interactive negotiations that are a necessary process within the overall process for managing the promotion business process. The above-mentioned approaches may also suffer from suboptimal security, authentication of trading partners, and legal enforceability of any output documents. And in some cases, the techniques employed do not contribute to a shared record or other mutual understanding of the promotion terms negotiated between the trading partners.